Fuel For Thought
January 2016

Nigeria spent N6.9TN on subsidy in five years – World Bank

▪ Nigeria spent N6.9TN on subsidy in five years – World Bank

Nigeria spent about $35bn (N6.9bn) in the last five years to subsidise petroleum products, the World Bank has said. In its ‘Nigeria Economic Report No. 3’, which was released in Abuja on Tuesday, the bank said fuel subsidy incapacitated the country’s ability to save for the rainy day occasioned by falling crude oil prices in the international market.

On gas, the report stated that despite serious disruptions in supply in the first half of the year, the country flared more gas than the one used in generating electricity, adding that much more gas was sold to foreign consumers despite the huge demand and inadequate supply at home.

The report presented by the World Bank Lead Economist in Nigeria, Mr. John Litwack, stated, “The fiscal cost of the fuel subsidy is very high, reaching an estimated $35bn during 2010–2014. Moreover, annual costs are increasing over time due to rising fuel demand and the depreciation of the naira.

“In recent years, numerous audits and reports have identified widespread corruption and fraud in the administration of the fuel subsidy, and official petrol imports have substantially exceeded actual consumption. Attempts by the government to crack down on fraud and delay payment of the subsidy have commonly met with severe fuel shortages in the country that also impose high economic and welfare costs on Nigerians.

“The $35bn cost of the fuel subsidy during 2010–2014 was a primary reason why Nigeria was unable to accumulate a fiscal reserve in the Excess Crude Account that could have protected the country from the recent oil price shock. Fuel subsidy obligations are expected to reach 18 per cent of all government oil revenues in 2015, and, if the current regulated prices are maintained, this is projected to increase to more than 30 per cent by 2018.”

The report added that the recent sharp decline in oil prices and revenues had motivated the country to reconsider its commitment to the fuel subsidy regime that compensates importers and traders of petrol and kerosene.

According to the report, annual spending on fuel subsidy accounts for roughly one-fourth of all federal budgetary spending, adding that the spending was significantly greater than the entire executed federal capital budget as well as the combined spending on education and public health.

The report stated, “The weak enforcement of administrative prices further reduces the benefits of fuel subsidies to Nigerian households. There are other important costs as well. Uncertainty about the fuel subsidy has strongly discouraged investment in domestic refining.

“Moreover, artificially low fuel prices distort incentives and encourage excessive consumption of energy. Allegations of corruption and fraud surrounding the implementation of the fuel subsidy are costly to the reputation of government.

“Finally, subsidy-related fuel shortages have repeatedly disrupted economic activity and imposed serious welfare costs on Nigerian households. In addition, every time the naira depreciates, the cost of subsidising a nominal fixed price increases.”

It added, “Part of the reason that the burden of the fuel subsidy did not decline in 2015, despite much lower oil prices, was the decision in January to decrease the administered naira price of petrol from N97 to N87 per litre.

“The logic given for this was that at the time, the world price of petrol had declined to the point where the size of the fuel subsidy would become negligible, and some of these benefits could therefore be passed on to petrol consumers in Nigeria.

“But the naira was under downward pressure at the time as well as partial strengthening of oil and petrol prices, the expected burden of the fuel subsidy once again rose to a level comparable to that of 2014.”

Noting that the country had the 9th largest gas deposit in the world, the World Bank said before the country could attract the huge investment required to develop the gas sector, it needed a well-designed institutional and policy framework.

▪ Philippines: Chevron rolls out Euro 4 products

Petroleum company Chevron Philippines Inc. (CPI), owner of the Caltex brand, has started rolling out Euro 4 compliant gasoline products in select locations across the country.

CPI said in a statement the Euro 4 Caltex with Techron gasoline is now available in Caltex stations in Metro Manila and select major cities, with full availability nationwide by the end of the year.

This is in compliance with the Philippine Clean Air Act and Department of Energy Circular DC2015-06-0004 mandating the use of environmentally clean fuels that meet specified emission standards.

CPI expects Euro 4 Caltex diesel and gasoline fuels will be available in all Caltex stations in the Philippines by Jan. 1, 2016, the deadline set by government for all oil companies to have Euro 4-compliant fuel products.

Euro 4 is a globally–accepted European emission standard for vehicles which require significantly low amount of sulfur and benzene.

▪ China: High-octane appetite continues

Despite of all negative news surrounding the development of the Chinese economy, the appetite for high-octane gasoline components continues. The number is sharply up from the estimated total of 3.5 to 4m MT of conventional, high-octane imports during the first seven months of the year.

China alone, as the 2nd largest gasoline consumer worldwide, has accounted for 25% of the global demand growth for the fuel in 2015. With other major markets, i.e. India recently experiencing a demand shift away from Diesel onto gasoline and the general octane shortage in the Asian region, the business appears to be a lucrative opportunity with a rather prosperous outlook.

▪ Malaysia: Euro 5 petrol gazetted to arrive in 2025, Diesel in 2020

The government of Malaysia has revealed new gazetted dates for the nationwide introduction of Euro 5 grade petrol and Diesel in Malaysia. The full specifications of the fuel types have also been announced.

Likewise, gazetted dates for the nationwide availability of Euro 5 Diesel have also been confirmed to be 01-Sep 2020. As per the new regulations set by the ministry, maximum Sulphur levels for the new Euro 5 standard shall not exceed 10 ppm from the fuel’s introduction onwards.

From then on, the government will enforce further Euro 5 Diesel standards such as its density at 15 degrees Celsius, distillation temperatures at 95% and percentage of polycyclic aromatic hydrocarbons. Currently, Euro 5 Diesel fuel is available in Malaysia courtesy of individual initiatives most notably by BHPetrol, Shell and Petronas. However, their availability has not been mandated by the government. Meanwhile, Euro 4 RON 97 petrol is already available nationwide, but Euro 4 RON 95 petrol will only be available come October 1, 2018.

To recap, Malaysians can mark their calendars for the nationwide arrival of Euro 5 petrol by 01-Sep 2025, and Euro 5 Diesel by 01-Sep 2020.

▪ Australia: Real-world emission testing coming in 2016

The Australian Automobile Association (AAA) will lead an 18-month research project in 2016, analysing the real-world emissions of Australian cars in the wake of the Volkswagen emissions scandal.

The AAA says it is “very concerned” that the Australian Government currently has no capacity to test, audit, or enforce elements of its current vehicle emissions regulatory regime, which is why it has commissioned an independent engineering firm to commence on-road testing of Australian vehicles in early 2016.

The AAA’s testing will be consistent with the Real Driving Emissions methods and protocols, developed by the European Commission, and will assess the emissions produced by popular vehicles on the Australian market, when driven on Australian roads, in Australian conditions.

The AAA research project follows revelations that more than 10 million Volkswagen Group vehicles were fitted with “defeat device” software designed to understate emissions produced in laboratory settings. AAA chief Michael Bradley says: “Action must be taken to test the emissions claims made by vehicle manufacturers, and as the leading consumer advocate for almost eight million Australian motorists, the AAA is willing to step up to the plate.

“There is a debate emerging around the adequacy of Australia’s current vehicle emission standards, but this debate risks being rendered meaningless unless a more relevant testing regime is put in place,” he says.

“The Volkswagen scandal clearly shows that regulators across the globe now need to be assessing the emissions produced by vehicles in the real-world, not just those produced in a laboratory.” Volkswagen Australia announced on October 9, 2015 that it would recall more than 77,000 Volkswagen and Skoda cars. Sister brand Audi has also confirmed that 14,000 Australian vehicles are affected be the “cheat devices”.

A Ministerial Forum chaired by the minister for major projects, Paul Fletcher, was formed in October with the purpose of developing a new approach to the issue of vehicle emissions. Some options for managing fuel quality standards, the implementation of Euro 6, new reporting standards for air pollutants, and new measures to deliver Australia’s 2030 climate change targets of reducing greenhouse emissions below 2005 levels, and improving national energy productivity by 40%, were also taken into consideration. The government is also offering low-interest loans to a select group of organisations to purchase low-emissions vehicles. The program excludes the general public and targets corporate and government fleet buyers, as well as not-for-profit organisations.

A government statement says that with an estimated 450,000 fleet vehicles, this represents a major share of vehicles on Australia’s roads. The $50 million program is funded through the Clean Energy Finance Corporation (CEFC) and is being provided through the Eclipx Group – one of Australia’s largest independent fleet leasing companies. It will provide Eclipx’s corporate, government and not-for-profit fleet buyers with access to favourable loan interest rates when choosing eligible low-emissions passenger and light-commercial vehicles. To be eligible for the CEFC finance, Eclipx customers must ensure the vehicles meet a carbon-dioxide emissions threshold 20% below the most recently published Australian averages for new passenger and light-commercial vehicles.

▪ China: Beijing schools close as city issues 1st smog red alert

Schools closed and rush-hour roads were much quieter than normal as Beijing invoked its first-ever red alert for smog Tuesday, closing many factories and imposing restrictions to keep half the city's vehicles off the roads. The alert in effect for three days — the most serious warning on a four-tier system adopted in 2013 — means authorities have forecast three consecutive days of severe smog.

Despite some improvement in Beijing's air over the past year, readings of dangerous particles were as high as a dozen times the safe level, in what has become an embarrassment for a government that has made a priority of cleaning up the legacy of pollution left from years of full-tilt economic growth.

A grey soupy haze subsumed Beijing's unique landmarks, and convenience stores did brisker-than-usual business selling air-filtering masks as residents sought to spend as little time outdoors as possible.

"This is modern life for Beijing people. We wanted to develop, and now we pay the price," Beijing office worker Cao Yong said during a break from work. Under the alert, schools were advised to voluntarily close unless they had good air filtration systems. However, Beijing's education commission later issued a separate order for all schools to close for three days.

Readings of PM2.5 particles climbed above 300 micrograms per cubic meter in some parts of the city and were expected to continue rising before the air begins to improve with the arrival of a cold front. The World Health Organization designates the safe level for the tiny, poisonous particles at 25.

"You have to do whatever you can to protect yourself," Beijing resident Li Huiwen said while stopping at a market. "Even when wearing the mask, I feel uncomfortable and don't have any energy."

Along with limiting cars to driving every other day depending on the last number of their license plate, a raft of other restrictions will seek to reduce the amount of dust and other particulate matter in the city of 22.5 million people. Officials said extra subway trains and buses would be added to handle the additional strain on public transport.

It's the second time this month that notoriously polluted Beijing has experienced a prolonged bout of smog, sending PM2.5 levels in the suburbs as high as 976 micrograms. Beijing was also shrouded in persistent smog for most of November, when power demand soared due to unusually cold weather.

While pollution in the capital improved in the first 10 months of the year compared with the same period last year, heavy smog that can be seen from outer space regularly forces Beijing schools to suspend outdoor activities and can even prompt highway closures because of reduced visibility.

"It is a sharp warning to us that we may have too much development at the price of environment and it is time for us to seriously deal with air pollution," said Fan Jinglong, a hotel employee.

There previously have been stretches of severe smog in Beijing that lasted more than three days. However, those had initially been forecast to last three days or less, so they did not trigger a red alert. The alert requires a forecast of 72 straight hours with pollution levels of 300 or higher on the city's air quality index.

The air quality index is very closely linked to levels of PM2.5, although it also takes into account other pollutants. For example, one monitoring site in Beijing that gave an index reading of 308 midday Tuesday also had a PM2.5 level of 258 micrograms per cubic meter.

Polluted air throughout broad swaths of China has had severe health effects. A study led by atmospheric chemist Jos Lelieveld of Germany's Max Planck Institute and published this year in Nature magazine estimated that 1.4 million people each year die prematurely because of pollution in China.

Most of the pollution is blamed on coal-fired power plants, along with vehicle emissions and construction and factory work. China, the world's biggest carbon emitter, plans to upgrade coal power plants over the next five years to tackle the problem, and says its emissions will peak by around 2030 before starting to decline.

While emissions standards have been tightened and heavy investments made in solar, wind and other renewable energy, China still depends on coal for more than 60 percent of its power.

▪ China rolls out emissions controls at ports

While the city of Beijing braces itself for “red alert”-level air pollution, shuttering industry and rationing driving, the Chinese Ministry of Transport has released detailed guidance for a set of emissions control areas at major Chinese ports.

The Implementation Plan for Emissions Control Zones (ECZs, as the ministry calls the areas) will require the use of low-sulfur fuels at eleven major Chinese ports. Beginning January 1, 2017, ships calling at these ports will be required to use fuel with sulfur content of not more than 0.5% while at berth. In 2018, this will extend to all ports in the Pearl River Delta, the Yangtze River Delta, and Bohai Bay, which together handle about 20% of the world's container traffic. In 2019 ships entering the ECZs near these port regions will be required to meet the low-sulfur fuel standard while under way.

This mandate is the first of its kind outside of the EU and the United States. Its specifications for fuel still allow five times the sulfur permitted under the IMO's Tier IV standard for formal ECAs, and they do not begin right away – but they will have the effect of implementing global regulations one year ahead of schedule. The IMO's Tier IV worldwide standard of 0.5% maximum fuel sulfur content – the same as China's ECZ requirement in 2019 – will go into effect in 2020.

The plan does not address NOx or particulate matter emissions, beyond encouraging Chinese authorities to implement existing domestic and international requirements.

The Ministry of Transport has recently acquired the authority to address port pollution under China's Air Pollution Prevention and Control Law, and observers say that the plan's release suggests that it is serious about implementation. Environmental quality has become a source of social unrest in China, and the ruling Communist Party places a high value on stability.

The plan requires a further review in 2019, and future steps could include adoption of a 0.1% sulfur content standard in the ECZs (as in European and American ECAs) and enlarged coverage of China's seaboard.

▪ India to ban cars on alternate days to reduce pollution

The Indian government has announced plans to restrict the number of cars on the road starting Jan. 1, 2016, by implementing an “odd-even” scheme. Cars with odd and even registration numbers will be allowed to ply on Indian roads only on alternate days. The announcement was made a day after the Delhi High Court compared being in the Indian capital to “living in a gas chamber,” ordering remedial action.

Other cities have adopted similar schemes, including Lagos, Nigeria, Athens, Greece, Manila, Philippines, and Beijing, China. The “odd-number” system, however, has backfired to a certain degree. Those who can afford, buy a second car to use during the days that their cars are banned.

Former Union Minister Jairam Ramesh described the move by the government as a “good step.” Ramesh said vehicles of state and central government ministers should also be part of the ban and no exemption should be allowed.

He said that if implemented seriously, the decision will have a “constructive impact” on India’s pollution problem. “Taking into account the present situation of pollution in Delhi, the Delhi government’s decision is absolutely correct. But at the same time, we cannot run away from the fact that we have to strengthen our public transport. But in the last five years the way metro has increased and is being used, if this new policy is seriously implemented, it will have a constructive impact,” Ramesh said.

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